The "Super Bad" Bank

We hardly need to create a "band bank". There are dozens of them already...

ALL BANKERS ARE IDIOTS, but only sometimes, writes Bill Bonner of The Daily Reckoning.

As a professional class, bankers are thought to be as immoral as Russian pimps and as incompetent as Renaissance electricians. Thanks to them, the banking system is in trouble. Thanks to the failure of the banking sector, the American and UK economies are in trouble. And thanks to the failure of the Anglo-American economy, the whole world is in trouble.

Everyone is on the bankers' case. In France, even Jerome Kerviel is criticizing his bosses at Societe Generale for not preventing him from taking "crazy risks". Meanwhile, in Britain, Sir Fred Goodwin, recently esteemed head of the Royal Bank of Scotland, is now said to be the "world's worst banker," according to The Times. Trevor Kavanagh, writing in The Sun, says he is "criminally incompetent." His purchase of ABN Amro is said to be the "worst acquisition in history."

In the new world, meanwhile, ISI Group figures that the top four US banks alone have $1.2 trillion in bad assets. The total market value of those four banks is only about half of that amount. The banks are "effectively insolvent," says Nouriel Roubini. So the feds have taken them into their care, if not yet into their custody.

But the bankers are ingrates. They borrow, but they don't lend. They take but they don't give. They party 'til the wee hours...and then, when the bill is served, they play dead.

The New York Times reports:

"At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money."

"Make more loans? Are you kidding?" Mr. Hope seemed to say: "We're not going to change our business model or our credit policies to accommodate the needs of the public sector."

Bankers don't make loans in the hopes of getting 'good citizenship' awards. They lend money when they think they can make a buck. The remarkable thing is that they're so bad at it. They lent recklessly when there was little hope of getting their money back. Now, with the widest spreads in history – the difference between their cost of money and their return on it – it's easier to rob a bank than get a loan from one.

There are two explanations for this anomaly. Both of them wrong, but nevertheless, we'll relay them here. The first is that bankers are wicked. A report in the UK's Daily Express, for example, tells us that Royal Bank of Scotland bosses "spend £50,000 on champagne banquet" celebrating Burns Night on Friday, before announcing a £45 billion loss on Monday morning. And over in the United States, the Wall Street Journal gave out word last Tuesday that much of the $140 million donated to fund the biggest inauguration in history came from banks that had received bailouts!

But wait, say the bankers' defenders, they're not evil, they're just incredibly stupid. Evil bankers might have sold sub-prime debt to widows and orphans, but they never would have kept it in their own accounts. At the end of 2007, for example, the aforementioned Sir Fred Goodwin had shares of RBS worth nearly £6 million; now his pile will barely buy a mid-size apartment in a bad section of London.

Now, we do not reject the 'bankers are stupid' hypothesis completely; we simply add an important nuance: they are not stupid permanently; they are – like the rest of us – only stupid episodically.

Among the queerest financial stories of the last week was the proposal to create a 'bad bank'. It hardly seems necessary. There are dozens of them already! But the idea is to transfer all the sins of the bubble era to one single 'bad bank' – an ill-starred sink funded with public money.

Then, the bad bank will be crucified so that the rest of us can have life, and have it more abundantly. We first saw the idea floated in the pages of the New York Times last week. Now, it has made its way to the Financial Times in London, gaining favor as the measure of sin increases.

And why not? The Sun says British taxpayers are on the hook for as much as £2 trillion. In America, the bankers face $3.5 trillion in losses, says Mr. Roubini.

But if the 'bad bank' idea could work, why not create a super baaaddd bank? We could use it to get rid of all our mistakes. Writers could unload their bad novels. Businessmen could sweep their errors under its broad carpet. What the heck, let people get out of bad marriages without penalty; the super bad bank could pay the alimony and divorce costs.

The hitch with the bad bank idea is so obvious even a banker could spot it. If the cost of mistakes is reduced, people might make more of them. Like the rest of us, bankers are neither good nor bad, but subject to influence. Unlike metallurgy or particle physics, banking does not have a rising learning curve. It's not science. Instead, it's more like love and gambling...with a circular learning pattern. They learn...and then they forget. They get carried away in the boom upswing; then they get whacked when it turns down.

So let them have a good beating. It will give them of a lesson that will last a lifetime...and give the next generation a solid banking sector.